Opinion: What lies ahead for Indian banks?
India’s banking system enters 2026 stronger than ever—lower NPAs, higher capital buffers, and RBI-backed liquidity. But tougher norms will test resilience
By Dr K Srinivasa Rao
The banking system has strengthened over the past three years, with prospects for continued growth in 2026 and beyond. Although deposit growth slowed from 13 per cent in FY23 to 11.4 per cent in FY25, and credit growth from 15 per cent to 12.5 per cent over the period, non-banks have continued to provide credit support to the productive sectors of the economy.
As a result of coordination between banks and non-bank financial institutions, the total flow of resources to the commercial sector has increased. In FY26, this stood at Rs 20.1 lakh crore, compared with Rs 16.5 lakh crore in the corresponding period of the previous year. Outstanding credit from bank and non-bank sources increased by 13 per cent (y-o-y).
Bank resilience has improved significantly over the past three years (FY23 to FY25). Gross non-performing assets (GNPA) dropped from 3.9 per cent to 2.2 per cent, reaching a historic low. Return on assets improved from 1 per cent to 1.4 per cent. Return on equity (ROE) improved from 11.5 per cent to 13.5 per cent.
The capital-to-risk-weighted-assets ratio (CRAR) improved from 16.2 per cent to 16.8 per cent and reached 17.2 per cent by September 2025. Profitability improved for the 7th consecutive year in FY25, despite a moderation in growth due to higher deposit costs; net interest margin declined to 3.1 per cent in FY25 from 3.4 per cent in FY24. Such strength will be the foundation for banks to perform better in 2026 and beyond.
Monetary Policy
Since June 2025, monetary policy has specifically supported bank credit growth as the economy has operated amid stiffer geopolitical headwinds, trade disruptions, and tariff threats. In addition to a cumulative 125-basis-point reduction in the repo rate, the CRR (cash reserve ratio) was reduced from 4 per cent to 3 per cent, releasing close to Rs 2.5lakh crore, with its positive impact expected to be reflected in incremental deposit growth.
The transmission of the repo rate cut is well underway. The weighted average lending rate or WALR (average interest rate charged by banks on loans, calculated by giving more weight to larger loan amounts) declined by 69 bps for fresh rupee loans during February-October 2025 (the interest rate effect).
The current 25-basis-point cut has yet to benefit borrowers. The transmission of interest rate cuts is still a work in progress. The RBI has been fine-tuning its monetary policy to enable banks to accelerate lending and support growth.
Operational Autonomy
Among others, certain credit-centric regulatory relaxations have been permitted to enhance banking resilience and boost credit flows to productive sectors of the economy. Banks can now fund acquisitions of Indian non-financial companies, expanding M&A financing options. Loan limits against shares and securities have increased from Rs 20 lakh to Rs 1 crore per borrower.
IPO financing limits have increased from Rs 10 lakh to Rs 25 lakh, and the cap on loans against listed debt securities has been removed. Risk weights for home loans (up to Rs30 lakh) have been lowered to reduce costs and boost housing credit. The RBI withdrew the penal framework for significant corporate exposures, previously fixed at Rs 10,000 crore, shifting to macroprudential tools while retaining individual caps.
Banks will have to hone their risk management skills as they implement Basel–III capital norms and the expected credit loss framework from April 1, 2027, with a glide path to March 2031
It is proposed to introduce risk-based deposit insurance premiums (DICGC) to move away from the current flat rate. There is also a proposal to increase the deposit insurance amount from the current level of Rs 5 lakh. Such differentiated deposit insurance premiums could benefit stronger banks, which may pay a lower premium.
Challenges Ahead
As part of amendments to the Liquidity Coverage Ratio (LCR) framework, effective April 1, 2026, all commercial banks will be required to maintain a 7.5 per cent run-off provision for stable retail deposits linked to internet and mobile banking systems, which are vulnerable to digital flight. Similarly, a 12.5 per cent run-off provision will apply to less stable deposits accessed through digital channels. Banks will be better able to manage liquidity risks when threatened by unexpected deposit flight through digital channels.
In 2026, banks will have to hone their risk management skills to begin implementing the Basel–III capital norms and the expected credit loss (ECL)framework, effective April 1, 2027, with a glide path to March 2031.
They will need to run parallel ECL models in advance, based on simulations, to test data integrity and refine the computation of probability of default (PD), loss given default (LGD), and exposure at default (EAD) frameworks, thereby enhancing forecasting capacity.
They need to implement ring-fencing of business risks, segregate high-risk and/or non-core activities, including in subsidiaries’ operations, and submit plans to the central bank by March 2026.
Activities such as real estate, trading, manufacturing, speculative investments and complex investment products will face tighter limits or be shifted to separately capitalised group entities. Structural implementation must be completed by March 31, 2028. The RBI further proposed faster complaint resolution through the integrated ombudsman scheme and enhanced digital grievance tracking.
With banks having built a firm footing over the last three years, the liquidity assured by the RBI, and the broader canvas of autonomy to expand credit, banks should be able to strengthen further their performance to fuel economic growth.
Some of the newly proposed regulatory guardrails are intended to strengthen the resilience and risk-management framework to protect stakeholders over the long term. In light of emerging challenges and opportunities in 2026 and beyond, banks should reinvent their strategies to realise their full potential in supporting growth.
In the broader context, balancing the governance, risk, and compliance framework will be the cornerstone of banks’ growth in scale and size.
(The author is an Adjunct Professor, Institute of Insurance and Risk Management, Hyderabad. Views are his own)
